Lira Heads for 3-Week High as Bank Sells Dollars for Third Day

The lira headed for the highest level in three weeks as the Turkish central bank sold dollars in the currency market for a third day and signaled it would raise the banks’ funding costs.

The lira gained 1.1 percent to 1.8737 per dollar at 6:17 p.m. in Istanbul, rebounding from last year’s 18.4 percent depreciation, the worst performance among emerging-market currencies tracked by Bloomberg. The currency headed for the highest level since Dec. 12.

The bank in Ankara is estimated to have sold about $850 million, including $350 million it sold in an auction today, Erkin Isik, a fixed-income strategist at Turk Ekonomi Bankasi AS in Istanbul, said in an e-mailed note. The bank started selling dollars directly on the market Dec. 30 after seeing “unhealthy price formations,” it said that day, sending the lira to its strongest rally in almost three years. The bank may reduce funding for banks at its benchmark rate of 5.75 percent and could carry out foreign currency sales to withdraw lira liquidity, according to Governor Erdem Basci’s presentation, posted on the bank’s website today.

In the bank’s final monthly meeting with economists, Basci “sounded very hawkish and said that they will keep the current policy stance,” Isik said. “This means no more cheap funding through the policy rate of 5.75 percent, so the average funding cost would elevate to the vicinity of 12 percent, from eight percent a week ago and 10.3 percent today.”

The central bank lent 3 billion liras in a one-week repo auction at an average annual rate of 11.86 percent today, compared with 5 billion liras at 12.02 percent yesterday. It hasn’t provided liquidity at 5.75 percent since Dec. 28, after the lira depreciated to a record low of 1.9224 per dollar on concern that Turkey’s monetary policy will fail to contain a burgeoning current-account deficit and accelerating inflation. The headline inflation rate rose to a three-year high of 10.5 percent in December, the Ankara-based statistics institute said today.

Yields on the two-year benchmark note rose five basis points, or 0.05 percentage point, to 11.53 percent, the highest level since July 2009, according to the RBS Istanbul Benchmark Bond Index.

“We think that intervening in the currency market to tighten lira liquidity is a very risky method,” Serhan Gok, head of research at UBS Menkul Degerler AS in Istanbul, said in e-mailed comments. “If the foreign exchange intervention does not have the desired effect on the currency basket, the lira interest rates will inevitably increase further.”